This places a firms products into one of four categories.
Star products have a high market share in a fast growing market.
Products may generate cash but because of the fast growing market, stars require huge investments to maintain their lead.
Net cash flow is usually modest.
Products in this category are attractive as they are located in a growing industry and these products are highly competitive in the industry.
Example:
If successful, a star will become a cash cow when the industry matures.
Cash Cows have a high market share in a slow growing market.
Cash cows require little investment and generate cash that can be utilised for investment in other products.
These products are the corporation’s key source of cash, and are specifically the core business. They are the base of an organisation.
Example:
Problem Children products have a low market share in fast growing markets.
These products require huge amount of cash to maintain or gain market share.
Problem children / Question marks are generally new goods and services which have a good commercial prospective.
Most products start as question marks as the company tries to enter a high growth market.
Example:
If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars.
Dogs are products with a low market share in slow growing markets.
These products neither generate cash nor require huge amount of cash.
Due to low market share, these business units face cost disadvantages.
These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc.
Example:
Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. The number of dogs should be avoided and minimized in an organization.
You need to know about the implications for a firm of having products in each category.
Limitations of the Boston Matrix:
- The matrix classifies market share and market growth as low and high, but generally businesses can be medium also.
- High market share does not always leads to high profits. There are high costs also involved with high market share.
- Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability.
- At times, dogs may help businesses. They can earn even more than cash cows sometimes.
- This four-celled approach is considered as to be too simplistic.
Implications for specific products:
- “Stars” should have the best employees, and first priority for investments. Critical to the future of the business, they must be defended at all costs. The typical investment stance for Stars should be “Invest” – prevent market share loss at all costs, and if possible grow share while the market is still expanding.
- “Cashcows” generate the funds required to invest in the higher growth parts of the portfolio. Ensure enough investment to sustain their leadership position – don’t milk them dry! The typical investment stance for cashcows should be “Milk and Defend” – spend the minimum to maintain relative leadership, but don’t invest to increase market share – you are already getting the benefit of market leadership, and this discretionary money could be better spent investing in higher growth markets.
- The third quadrant is either called “Problem Children” or “Questionmark”. They are the toughest businesses to know what to do with. The market is growing, however we are starting from a position of relative weakness. A binary decision must be taken. Selected bets will be made with very heavy investment to grow market share and make them the Stars of the future. Because they are coming from behind, they will not deliver the short term returns of the stars. Therefore the business must make these bets very selectively where they genuinely believe they can achieve a leadership position, and make the tough decision to ignore other high growth opportunities. The best name for this binary investment stance is “Double or Quits”
- “Dog” quadrant has a typical investment stance or “Harvest/Exit”. In reality though, it will not make sense to divest or exit businesses rapidly in this quadrant beacuse they will have low value and will distract management during the sale process. Frequently their weak competitive position leaves them incapable of being “harvested” either – if investment is reduced they may disappear very quickly. Rather they could be set up to operate with minimal resource drain on the rest of the portfolio, as the best people and all discretionary resources are diverted to more attractive businesses. Over time they will become a diminishing portion of the portfolio.
